Photo: Union Pacific
This article was updated on Oct. 28, 2014.
When looking for promising candidates for your stock portfolio, it's easy to just think about the prominent names of the day, such as Facebook, Ford, or Bank of America. But there are plenty of other possibilities, many of which have been under our nose for quite some time.
Permit me to introduce you to Union Pacific (UNP +0.57%), for example. Here are a bunch of interesting things about the company and its stock.
- The basics: The company traces its roots back well before the Civil War, to 1848 and the completion of the first 10 miles of the Galena and Chicago Union Railroad. In 1862, President Lincoln signed the Pacific Railroad Act, authorizing the Union Pacific and Central Pacific railroad companies to build a transcontinental railroad. Union Pacific's first rail was laid in Omaha in 1865.
- Today, Union Pacific is one of America's top railroad companies, with roughly 32,000 miles covering 23 states in the Western two-thirds of the country. As of 2013, it employed 46,500 workers and sported 8,300 locomotives.
- Like other railroad companies, Union Pacific has been challenged by weakness in the coal market in recent years, but less so than its Eastern rivals CSX (CSX 0.18%) and Norfolk Southern (NSC 0.38%). In the past year, it was hurt by weakness in crude oil, but has been transporting a lot of imported beer, among other things. Also helping it deliver solid results have been price hikes.
- Union Pacific and holders of Union Pacific stock do face some risks, though, such as the fact that Berkshire Hathaway's BNSF (Burlington Northern Santa Fe) Railway is looking into powering its trains with natural gas, which could help it compete better on price and put pressure on its competition.
- Union Pacific stock is up about 48% over the past year, and it has averaged annual gains of 24.3% over the past decade and 15.2% over the past 30 years. Clearly, Union Pacific stock has been good to its shareholders.
- Holders of Union Pacific stock enjoy a dividend yield recently around 1.8%, with the dividend having been raised 10% this summer and averaging an annual gain of about 21% over the past 10 years. The payout ratio is low, too, with Union Pacific paying out only about 39% of its earnings, leaving plenty of room for further growth.
- A peek at some of the characteristics of Union Pacific stock via the company's financial statements offers reasons to smile, with measures such as net profit margins and return on invested capital generally rising steadily in recent years and free cash flow more than doubling over the past few years to $3.2 billion.
- The valuation of Union Pacific stock looks un-bargain-like, with a recent P/E ratio near 22, but its forward P/E ratio is around 18.
Demand for railroad services isn't likely to flag anytime soon, especially as rail transport is far more cost-effective than trucking. (Trains can transport a ton of cargo more than 400 miles on a single gallon of fuel.) Union Pacific stock is worth considering if you're looking for a solid long-term performer as well as dividend income. Investors might want to buy some now -- or add it their watch list, and hope the price drops some, offering an entry point with greater margin of safety.
